What Small Businesses Need to Know about New Overtime Rules

There may be errors in spelling, grammar, and accuracy in this machine-generated transcript.

Roger Harris: Well welcome everyone. It's another federal tax update podcast. I'm Roger Harris and as I was going to say, always. But we had a little hiatus over tax season from Annie. But Annie Swab joins me. Annie welcome back.

Annie Schwab: Thanks. It's good to be back. I've I've enjoyed the last couple of podcasts. Good topics. Good. Good [00:00:30] energy. We're getting a lot of views, so I hope everyone enjoys this one as much as the ones before it.

Roger Harris: And it means tax season is over. That is true. 15th is over.

Annie Schwab: So the lull we're in, the in-between.

Roger Harris: We're in the whatever the lull is, it's between tax seasons. We're going to be a little different today. We're going to talk about some small business issues. Um, some of these things, you know, we haven't really spent any time on, there's been some, some rulings. One of the things [00:01:00] that I guess I'll start by saying, there's two ways that businesses primarily get impacted. There's legislative changes, and then there's regulatory changes. And regulatory changes can just pop up out of nowhere. And they can also change dramatically based on what party is in control, whether they're business friendly party, or they're viewed as a business friendly party or a business unfriendly party. And a rule that, you [00:01:30] know, we were told would be the way it's always going to be gets changed because elections change. So we're going to talk about things that are probably more regulatory than legislative in terms of uh, uh, laws being passed. And some of it isn't new in the sense that they aren't issues that we've had to deal with before. But now the rules and kinds of things that we have to think about are, are different, and they're pretty common [00:02:00] if you're in the small business world of accounting. So any talk a little bit about what we're going to talk about and then we'll get into some details.

Annie Schwab: Sure. So um, you know our focus today is going to be on employment concerns, so to say kind of, you know, when you think about employment issues for small businesses, I my guess is you jump to hiring and firing or determining a salary or maybe finding the right person and having retention. But there there are a lot of [00:02:30] things to consider. I mean, it can be from minimum wage, work environment, safety, overtime pay. Um, who's exempt from overtime pay, child labor laws? Um, there's you've got the doll, you've got the Fair Labor Standards Act. Um, you know, there's different organizations that focus on different aspects, but they all sort of come into full circle. When you're thinking of a small business owner trying to grow their business, finding the right talent, [00:03:00] retaining that talent, you know, making sure that you're abiding by all the state laws. It could be state, it could be federal, etc.. And so it's it can be pretty intense, um, and sometimes overwhelming and honestly. So that's we're going to focus on a few of those issues today.

Roger Harris: Right. And and I'll speak for Paget. But I think it's true for all people who deal with small businesses or really that are in this profession. There's this, this push, if you will, to move into advisory. [00:03:30] And if we're primarily a tax firm, we think advice is always tax related, that it's always about advising and taxes. But if you are in the small business community like we are and he just mentioned all kinds of other areas, you know, we you've heard us talk many times about beneficial owner. Well, that's not tax related, but that's an advisory opportunity when we're talking about hiring and minimum wage and overtime [00:04:00] and working your kids inside the business. These aren't all tax related, but they're great opportunities to to become knowledgeable and be of. We are considered by most of our clients to be their primary advisor, and I agree, we may think it's just tax. They think it's bigger than that. They think we should be able to advise them on things beyond taxes and in many instances, some of the things we're going to talk about today, if [00:04:30] you're going to if you're going to venture into the small business world, these are the kinds of things that you're going to have to think about and be prepared to advise your clients on. And so we thought it was appropriate to to take today's podcast and go back through some things that will be reminders and some things that will probably be new to you, because there are a.

Annie Schwab: Couple of new things.

Roger Harris: Yeah, there are some recent developments. So, um, let's [00:05:00] start with the Fair Labor Standards Act, which is a federal law regarding minimum wage. But any what's the minimum federal minimum wage today?

Annie Schwab: $7.25 per hour. And it has been that since July of 2009.

Roger Harris: So do you think there's anybody out there not paying the minimum wage in today's environment of hiring?

Annie Schwab: I would suspect [00:05:30] not. In fact, some states have set their not some the majority, I should say, of states have set their own minimum wage laws. And when you look at federal and state, you're required to pay the higher one. So none of these states are paying $7.25. I don't know anybody that would work for $7.25.

Roger Harris: So, um, so why do I care about this law if it's 725?

Annie Schwab: Well, it's important to know who would be subject to overtime pay, which could be based on time and [00:06:00] a half. Um, generally, overtime pay is considered time and a half. Um, it's for 40 hours of work week. We we well, we are well aware that there are lots of people out there working way more than 40 hours a week. Um, and in all honesty, the Fair Labor Standards Act, um, it's been around a while, and it established safety measures to protect the workers and establishes minimum wage, overtime pay. What kind of record keeping the employer must have. Um, youth Youth employment [00:06:30] standards. There's certain ages that you can hire for certain industries. You know, you have to be a certain age, for example, to go work in, you know, mining or meat processing, like there are some industries that require, you know, you can't hire anybody under 21 or 18 or some are 15 and 16 requirements. And so it gets complicated. Um, and there's I would say there's probably five areas of the FLSA minimum wage, which we talked about overtime pay, [00:07:00] um, what hours are considered to be, um, you know, required to be on the premise or on duty, the record keeping and then the child labor. So, you know, there are five very important focuses, um, here. And I think today we'll probably focus mainly on overtime rules and then kind of summertime hiring college kids or high school kids during the summer, maybe hiring your kids to work in your own business. And then we'll touch on a few other little things. Yeah.

Roger Harris: The main point is a [00:07:30] lot of people think, well, if I'm paying more than 725, then why do I care about the Fair Labor Standards Act? Well, Annie, you just covered a lot of the things that we're going to talk about today. It's much more than just the minimum wage, But a couple of points. You mentioned state laws, which we we're not going to cover states today because we don't have time to cover 50 states, each state wage laws. But you need to understand what your state's laws are, because particularly when it comes to the hourly wage, those are going to [00:08:00] override. 725 um, we were talking before we started recording today. You may have to worry about the city's minimum wage, because. Annie, what were you telling me about San Francisco?

Annie Schwab: San Francisco, apparently, is the highest. Currently the highest minimum wage at $18.25 an hour. Right. So, you know, you need to you need to focus on that. And some states do by the week, a seven day period. Most states do a seven day [00:08:30] period, but some require overtime on a daily basis. So, you know, 40 hours a week versus eight hours a day. So that's also something that you need to be familiar with in your state. Right.

Roger Harris: So so we're going to touch on some federal and some broad based discussions. Please understand that you may have state laws that are tougher easier whatever. You kind of got to go with the I don't know how to say this the worst of the two or the best of the [00:09:00] two. However, you, depending on how you're looking for it as the employer or the employer. Um, one other thing, because I know a lot of people say, well, how do I know if my client is covered under the Fair Labor Standards Act? What what covers them? And, and there's a lot of different ways to be covered, but the one that seems to be the catch all for everybody is if you deal in interstate commerce and you're going, well, no, guy's a plumber. He didn't, you know, he didn't go outside of his neighborhood. But if you take a credit card. [00:09:30] Mhm. You're dealing in interstate commerce because most likely that credit card company is somewhere else. So you pretty much just have to assume that every small business is covered. Uh, I think.

Annie Schwab: It's safe to assume every small business is covered by interstate commerce.

Roger Harris: You may. You may actually find one somewhere that none of this applies to. And still, that doesn't mean they're not covered under the States, because, you know, uh, who knows what the state rules are. So so we're going to talk about the Fair Labor Standards Act. I'll say one other thing before we get into details. And I [00:10:00] don't know, it's been a long time, but if you've ever had a business go through an audit by the wage and hour people, it's awful. It is.

Annie Schwab: It's intense.

Roger Harris: It is the worst that you'll ever go through because they make it known when they usually they don't come in unless there's been some sort of complaint. They don't have people just roaming around looking to do audits. But if an employee were to complain that somehow you're in violation of something, [00:10:30] they come in and they're on the side of the employee and they make that very clear. And if the employee tells a story and the business owner tells the story, that's different. They're probably going to side with the employee unless there's just overwhelming evidence that the employee made it up. So the last thing you want to do is go through one of these audits.

Annie Schwab: Yeah. And it's super easy for an employee to to file a complaint. Um, all the states [00:11:00] have a website that allows someone to log in, file the complaint. It can be anonymous. You can, um, or not, or they, they will contact you if you want to share your story. Um, but it's free to do and, um, highly encouraged, actually, by the States.

Roger Harris: Yeah. And they're not just going to come in and tell you fix it. They're going to go back and in many instances make you pay back wages and back overtime and things like that. So it's painful and it can be expensive. So [00:11:30] yes. All right. So we're going to talk primarily about a couple of things in detail. We'll talk about because there's been some changes. One of the big issues that small business faces is the issue of overtime. You know what? And when do I have to start paying overtime? And because that can get expensive if you if you're trying to get around, you know, and it's particularly difficult because in today's time [00:12:00] everybody is struggling to find employees. So you know, if I can find one, I probably want to work those suckers 65 hours, 70 hours a week because I need them to do two people's jobs, and I'm going to try to find a way. Small businesses always try to find a way. And I'm not saying this isn't being critical of them, because they're trying to earn a living to get by as best they can. And so they're looking for ways to work that employee [00:12:30] 65 70 hours and not have to pay them overtime. And sometimes that'll work. Sometimes that won't work. So we're going to spend some time talking about overtime. And when it kicks in and when it shouldn't kick in.

Annie Schwab: And honestly, it's who it applies to, right.

Roger Harris: And who can. Yeah.

Annie Schwab: Because you know who's exempt from who who can work 70 hours and not you don't have to pay overtime. There's there's exemptions for certain types of, um, workers, employees, positions held. [00:13:00] Um, and so that that anytime there's a little bit of facts and circumstances or a little bit of gray area, it can certainly be manipulated. Um, or, you know, you're following on falling on that gray line.

Roger Harris: And, but if you've worked in the small business community long enough, you've gone into some business and said, look, we need to talk about minimum wage and overtime. And they go, I don't have to worry about overtime. All my people are on salaries. So we'll talk about that. That's that's [00:13:30] maybe true, maybe not true, partially true. But I love how that, you know, when they all get together and talk, it's oh, you don't have to pay overtime, just pay everybody a salary. So we spend some time on when that works and when that doesn't work. We're going to talk about child labor, though I don't think a lot of us, when we hear the word child labor, we think we're bringing eight year olds and making them work, you know? And no, um, I hope we're not [00:14:00] talking about that. But there's, you know, there's there are some, some rules regarding working with kids and then there's actually some tax benefits to particularly if they're your children. So we'll spend a little time on that and then we'll touch on some other stuff. But let's let's move to the big E, Annie and start talking a little bit about overtime and kind of basically what are the rules first and then what do we have to worry.

Annie Schwab: About in general? In general, um, overtime has been around a long [00:14:30] time. Overtime basically means time and a half. Um, you, you know, you have a worker, you you divide it into, you divide their salary into a weekly pay, and you sort of figure out, you know, how many hours in that that week can they work before they're required to pay to pay overtime? And the reason I think we're focusing on this is because, you know, the Fair Labor Standards Act has been around for a long time. But just recently, right, as we finished tax season, [00:15:00] there was, um, a new notice, I guess announced a final rule, and it changed the treatment of overtime for three categories of workers. Um, the executive, the administrative and professional, which they kind of combine into one outside sales and computer employees. So the, um, let's say exemption from having to pay those types of workers overtime has changed [00:15:30] and changes July 1st. So we're talking right around the corner. Um, these final rules have updated and revised the regulations. Um, it has implementing the exemption from minimum wage and overtime pay requirements for those groups executive, administrative, professional and it's causing employers to consider do I raise their salary to get over that threshold? Do do they fall into a category that's exempt? And so [00:16:00] it's all of a sudden this hmm. How like you said, how can I get the most out of my workers paying a reasonable salary, but maybe avoiding overtime rules. So that's kind of where we stand today.

Roger Harris: Yeah. And and it it just came out. Uh, it's one of those regulatory things. That's why you don't hear this big thing about Congress passed a bill or the president signed it. This is something that the Department of Labor just changed. And that's within their that's what they do ask you to do it. And this [00:16:30] was actually changed kind of in a more business friendly way under the Trump administration. So some of this was the Biden administration correcting what they thought was too friendly of business, um, ruling before. One other thing. I just want to give you a couple of of examples. Remember, we're talking about overtime. Now, if you're only working 30 hours, you don't have a problem. You know you've got to be working more than 40 hours. But be careful. I mentioned how unfriendly these [00:17:00] things are. I know of one instance where it was a pharmacy who delivered, but they didn't start delivering until 1:00, so they didn't deliver in the mornings. So they had a driver that came in every day at 1:00 and delivered till 6:00. 7:00, whatever, you know, whatever it took. So given those in their world, it wasn't until they weren't working 40 hours. However, the [00:17:30] delivery person was an older gentleman whose wife had passed away. He lived alone. He liked companionship, so he would come into the pharmacy at 11:00 and just sit around and talk to people until 1:00.

Roger Harris: And when the business got audited for the Fair Labor Standards Act, they were told that because he came in at 11, even though the premise wasn't doing anything, [00:18:00] those hours counted. And not only did he owe them for those two hours, it kicked him over 40 and he owed overtime. And the employee said, I don't want it. It was my choice to come in. And they said, no, the law if you come into the place. So as an employer, you have to tell everyone. If you don't start work till one, you can't come in here before 1:00 because it could be deemed that you're on the clock [00:18:30] now. Also, these are just some extreme examples, but it's yeah, that's you never want to go through it. This pharmacy also had a lunch counter. And so when people took their lunch break, many people just went to the lunch counter and ordered their lunch. They didn't go off premises. They didn't bring it in. They would just, you know, two people would be off at the same time. They'd go sit at the lunch counter or lunch and talk to each other, and they [00:19:00] had to pay them for those hours because they were on premises. And based on the the regulatory rules, they could have been asked to do something, not that they were asked to be to do anything.

Annie Schwab: But they were available.

Roger Harris: They are available. So they those hours counted as well. So it's not just it's 40 hours, it's how you get to 40 hours. And you really have to tell people if you allow people to come out, if they come in ten minutes early to [00:19:30] right, right, right or something. But if someone just comes in and wants to sit around, first of all, it's probably not good for the other employees because they're bothering them. But but if somebody wants to come in early and just hang around because they're lonely, can't do that. You know, that's I have to pay you for it. And if you have a lunch counter or and I think it even discusses lunch, if you make them stay around while they're eating, then you can't pull that hour away from them, even though you know they're not working, they're playing on their phone. Today's [00:20:00] world especially, they're all playing on their phone. They're doing stuff their mind's not. But you got to be careful that you don't allow things to slip in by trying to be a nice employer.

Annie Schwab: Lenient? Yeah.

Roger Harris: And some other employee gets mad at you, turns you in, and then, even though this delivery guy didn't want the money, they had to pay him. So. So all right, that's those are those are just examples of where it's, you know, it can be [00:20:30] I think, terribly unfair, but let's assume for right now, there's no question about the 40 hours. The question is, can I pay this person and not pay overtime? That's kind of what we're talking about. We've got somebody who, uh, again, to go back to my earlier example, everybody is an salaried employee, so I don't have to pay overtime. So any kind of all.

Annie Schwab: Yeah, you have to fall into the definition [00:21:00] of executive or administrative or professional outside sales computer employees. So there's you have to fall into that category where, you know, you can hire and you can fire and you have, uh, you know, you're running the business and you're making decisions and, you know, you fit that sort of executive role or professional role, right? Um, in order to be in order to be exempt from overtime rules. [00:21:30] Right.

Roger Harris: So we'll go through three things. There's you have to qualify as one of these four groups, and we'll touch all four of those. Then you have to pay them a salary and then it has to be the right amount of salary. Right? Right. So there's like three tests. So you talked a little bit about, uh, I guess executive. So you got to, you know, you got to have uh, a certain amount of administration. I think you have to have a certain amount of [00:22:00] authority, directly or indirectly. Authority. Yeah. And if you have those, you are an executive. You're not finished yet, but you at least qualify as an executive. Yeah, yeah, we'll get it.

Annie Schwab: And then there's a salary level, um, associated. Um, so before, uh, July of this year, that salary level was $684 a week, which basically turns in to be about $35,600 [00:22:30] a year. So that was sort of that salary level. And what happened, um, in April is that they raised that starting in July to $844 a week, which is about $44,000 a year. So that's the the level at which a salary can be set. And if, if it's equivalent to that salary on a weekly basis, then you would be exempt from paying overtime for that employee. [00:23:00]

Roger Harris: So for an executive, you got to first of all meet the duties and the responsibilities and authority definition. Then you have to be paid at least this amount of salary, which is going up July 1st to. Right. So I can't call you an executive and pay you $20,000 of salary.

Annie Schwab: That will not work.

Roger Harris: So. All right, so that's executive. What about professional?

Annie Schwab: Uh, professional is also [00:23:30] another standard in which, uh, maybe like a degree was, was earned or, um, there's a specific, um. What's the word I'm looking for? Um, talent of some sort that you have that you reflect something that not everybody can do. You have skills that not everyone can do. And the salary thresholds are the same for this category as well. It's not a different salary amount. It's just a different, different definition. Um, of that category. [00:24:00] Yeah.

Roger Harris: And one thing that they made very clear in this area, it has to be something, some skill that you got through coursework and degrees. Experience doesn't make you a professional. So good point.

Annie Schwab: I remember that.

Roger Harris: Yes, you could have done it for 20 years and be better than anybody with a college degree. That. But you don't qualify because yeah.

Annie Schwab: Think of all those, uh, you know, the, [00:24:30] the things that come after your name, you know, the things that make you credentialed, so to say, um, that does.

Roger Harris: But like I said, you could have done something 20 years and be the best in the world at doing it because you did it for 20 years. That doesn't make you a professional. And therefore from an overtime standpoint, you're not exempt. So all right. Administrative this is one that everybody wants to throw everybody into. So talk a little bit about the [00:25:00] administrative part of it.

Annie Schwab: So think of um decision making um hiring, firing um policy ish. Um, kind of ranking in the business. I was trying to think of an example here.

Roger Harris: Well, an office manager. Well, it's probably a little bit more than an office manager.

Annie Schwab: Yeah. Someone who. Who does implement office policy. Um, implement, uh, quality in [00:25:30] service provided by the practice. Um, it wouldn't be just, you know, the person who answers the phone at the front or clearly clerical.

Roger Harris: This is not clerical.

Annie Schwab: This is not clerical.

Roger Harris: And since I use the term office manager, titles mean nothing. It's what you do. You can't just call them something and make them something. You have to actually have the work that they're doing.

Annie Schwab: You know, think, think, decision making, think part of leadership. So to say, um, something other, you know, something a little bit higher up. Um, [00:26:00] and again, it's hard. It's hard because it's very gray. It's a, it's a gray category. And I think we are reaching a point where there are a lot of employers who are looking at this new threshold. You know, it was 35, now it's 34, basically. I mean, sorry, 44 basically. And they're thinking to themselves, should I just give this employee a $9,000 raise and and avoid having to worry about overtime for this person? Um, and and [00:26:30] I will tell you, it changes, you know, in a couple of days, but then it is going to change again.

Roger Harris: It's gone up a couple of times. Yeah.

Annie Schwab: It's. Yeah. And then every three years after that. So this is looks more like a correction. Um in stages. So you've got July 1st and then you've got January 1st, and then you've got every three years where they sort of adjust the annual salary for, you know, inflation purposes. So, you know, just because you can get by in July doesn't mean [00:27:00] come January. Now you're looking at a $20,000 bump. So the the annual salary for these types of workers starting in January will be nearly 59,000. So, you know, if you go from 35 to 59, you know, basically in a year, a little more than a year.

Roger Harris: Yeah, you may find that paying them an hourly rate and paying them overtime would be cheaper than trying to play this salary game and calling them administrative because they're continuing to [00:27:30] raise now. Again, this could all change with the next election. And whoever takes over the Department of Labor, they could bring it down and it could also go up. I mean, again, Department of Labor is a regulatory agency and it's not. I mean, they're overseen by Congress, but they can do pretty much whatever they want to. I mean, they'll be hearings and they'll be complaining, but they can do what they want to. So, you know, as our clients try to find ways to pay people salary [00:28:00] and not pay overtime, they may find that they're better off to pay hourly and overtime.

Annie Schwab: And overtime.

Roger Harris: So than to pay a higher salary, you know, presuming they even get to that test. Because in this administrative test, you know, you mentioned gray area. I think one of the things they say is they must be able to make important decisions. Well, decision.

Annie Schwab: Making is definitely one of.

Roger Harris: Them. What what constitutes an important decision versus not important decision.

Annie Schwab: Yeah.

Roger Harris: And again the different businesses you know. So [00:28:30] you may never get to where the salary matters. You may lose on the fact that they say, well, that person, in our opinion, doesn't get to make important decisions to you. They may be critically important to the business, you being the business owner. So, um, so we've talked about administrative, we've talked about executive, we've talked about professional. Let's I mean, I'll touch on outside sales because that doesn't mean every sales person who works outdoors is exempt. That means they don't work in the premises [00:29:00] of your building. Right. So, uh, there is an exemption for outside sales people. But again, if they come to your office every day, they're not outside salespeople.

Annie Schwab: So and same thing with, uh, computer employees. It's a it's another, um, defined category. Um, I don't think those two I don't think outside sales and computer employees are taken advantage of as much as the broad executive, um, definition. [00:29:30] But just so that, you know, that, you know, there are those categories as well.

Roger Harris: And be careful in each of these categories to understand where bonuses and incentives can factor in, you know, to, to their pay. Um, and remember this, this is being done to improve the employees situation. So the agency is really not worried about the business [00:30:00] owner, as bad as that sounds. So you're kind of starting any of these discussions or judgments or concerns behind. It's like, you know, starting a football game and the other team's already got ten points. You know, you got to catch up to get even before you have a chance to win and win. Um, so, you know, it's one of these things that if someone says, I don't want to pay overtime, you might really be better off. So, um, so again, [00:30:30] as we're looking at the move to, uh, advisory services, think about the opportunity that just something like this, particularly given that it's timely. Uh, to your point, as we record this, we're, what, 25 days away from the new salary limit salary. And, uh, now I'm going to throw something in here that's really specialized. But because we're a franchise, I want to touch on [00:31:00] it because it's not really part of our deck here. But there's something called the Joint Employer Standards. And again, I hate to keep making everything political, but this is um, there are certain organizations that want to look at now. Remember a franchisee is an independently owned licensee of a franchise, or so they purchase. They hire their own people. They, you know, they do their own thing. [00:31:30]

Roger Harris: But there are groups of people out there who want to consider the franchisor and all the franchisees as one business, one employer, because in doing that, any exemption that's based on being small goes away. Now you're pooling all these people into one big pot. You can unionize them. You can do all these other things. You can be impacted by others. There is a big fight [00:32:00] every year. Uh, and little things like if a franchise or offers too much control over a franchisee, particularly when it comes to the hiring and compensation of a franchisee. Uh, those are the kind of things that lead to them being deemed a joint employer. So if you're a franchisor or a franchisee, you want to push back from something like it says, well, you have to pay these people this [00:32:30] amount of money and they have to do this job from this time of day to this time of day. Because if you get too specific, uh, you subject yourself to being considered a joint employer and all the negative concepts that that could, could bring upon you. This is pushed primarily by the unions because you need a certain size, and then you can go unionize and you can negotiate. You can get all the additional benefits. Probably not going to hit many of your, uh, clients. But if you have franchisees, [00:33:00] particularly, um, they need to push back if if they're getting too much control placed on them by their franchise, or particularly as it comes to the employees.

Annie Schwab: That's really what it is. It's about control and setting standards that they are pushing on and and making mandatory to their franchisees. And like you said, it is the focus on this part of it is on, you know, hiring, working conditions, duties, descriptions of [00:33:30] job, right, you know, limitations, exceptions, thresholds, all of those kind of decisions need to continue to be made at the franchisee level. Otherwise they could be deemed as a joint employer.

Roger Harris: Okay, really wasn't part of our thing, but when you get into something like that, yeah, it's again, depending on your practice and who your clients are, it might be something that that would be relevant to, to someone. And again, we keep stressing here that being [00:34:00] able to be the primary advisor for a small business owner and offer them advice doesn't have to be just about taxes. There's plenty of things that are maybe more valuable than a tax planning tip. Um, if you can keep them in compliance with certain regulations. So, uh. Good point. All right. Let's talk a little bit about, again, child labor law. Again, not expecting [00:34:30] a bunch of eight year olds working in coal mines here. No, no. Talk about what? When we talk about the child labor law and how it's impacted in this and other areas, what are we talking about?

Annie Schwab: So general, in general, when young people come to work for you, you want to make sure that they have a safe environment that doesn't jeopardize their health or their well-being, that it doesn't prevent them from having educational opportunities. So think think of it as real work for real pay so that [00:35:00] you got to get them in there. You got to provide work that's beneficial and fitting. Let's say fitting for their age, fitting for their talent, fitting for you know what that is in an industry, you do have to pay them. I mean, you can't just bring them in to work for free. You got to pay them something reasonable. I mean, all of these things seem so obvious and so fair. Um, make sure that the work that they're doing is age appropriate. And, you know, there's some industries, like I think I mentioned earlier, mining or like roofing, you can't [00:35:30] you can't hire someone under 18 to do roofing.

Roger Harris: And you have to watch state laws here as well for this. Oh you.

Annie Schwab: Do. Yeah. And so just think, you know, real work for real pay and a safe environment, um, that is appropriate for their talents and their age. I mean, that's kind of like the goal, the main message here. Now, there's there are some benefits, like if you have a business and your kids are out for the summer. Um, there's some really good things about hiring your own [00:36:00] kids.

Roger Harris: Your own children.

Annie Schwab: Yes, your own children.

Roger Harris: To work in business. And there can be some big advantages if it's your again, you can't hire anybody's child and work them in a coal mine at age eight. But no, there are some clear advantages to hiring your own children. And so talk about that.

Annie Schwab: So, you know, same same rules apply. You know, it has to be a safe environment. So depending on your industry, it has to be, you know, something that they can do, uh, actual work, real work. Um, but there is a business incentive to [00:36:30] that because you get to deduct the wages that you pay your child from your net income of your business. So you're reducing net income by paying your child. And if the child is under 18, then you don't have to worry about FICA or Social Security or Medicare. You don't have to withhold the tax from that. Um, in fact, if they're under age 21, you don't even have to worry about futa. So that there's a benefit there. Um, and then think about it. On the child side, if you pay [00:37:00] the child up to the standard deduction for that child, then they don't even have a federal income tax requirement. And so it's sort of like you get a deduction on your business. They don't have to report it. You don't have to worry about FICA, um, or futa. And the, the big bonus here is your kids learn to start saving investing in college. Um, you know, learning what it means to be financially responsible. So, I mean, there's like these monetary things, and then there's sort of like the bigger picture. [00:37:30] Um, so we do, especially in the summer, we do get questions from a lot of our office owners whose clients or, you know, bringing in a son or a daughter to answer the phone or make copies or, you know, do do tasks that are appropriate and there is some benefit there, both for the child and for the business.

Roger Harris: So let me ask you this, Andy. So I live in New York effectively between federal, state and local taxes. I'm paying $0.50 on the dollar of every dollar I earn, and I'm having to [00:38:00] give my kids money to live on. Why don't I just stick them on the payroll and pay them $1,000 a week for coming in every couple of hours? So they're getting the money they want, and I'm getting to deduct all that money, why don't I? Why don't I just do that?

Annie Schwab: Well, because you have to have a real work for real wage. That's sort of like the theory here. They it can't. You can't. Um, it's got to be a reasonable salary. It has to be business [00:38:30] related work. They can't go get your dry cleaning. And you say that they worked in the business. They can't cut the lawn at your house and pay them through the business. Um, you know, all of those those, you know, Labor Act standards remain.

Roger Harris: And the first thing, again, if it's questioned, they're going to ask you, would you pay anybody else $1,000 to do that? And the answer is, of course not. They're my children. Well, you just lost. I mean, you got to be equivalent. You [00:39:00] know, the argument to what is fair and reasonable is not a necessarily a dollar amount. It's what would you pay someone not related to you for the same job? And so yeah, if all you're doing is picking up my dry cleaning and cutting my grass, I wouldn't pay somebody else's child $1,000. Yeah. So you're.

Annie Schwab: Not going to run that through the business so.

Roger Harris: You can pay them $1,000, but you can't run it through the business? Yeah. So but again, there's there's definitely some, some planning opportunities. [00:39:30] If you have children of age who can contribute and do something that is needed in your business, and you pay them a equivalent of instead of paying someone else's child, paying your child, it gives them some money, it gives you a deduction. Hopefully it offsets some of the other money you would be giving your children anyhow. So there's some savings there, but there are rules. You just can't go crazy with it and.

Annie Schwab: Arbitrarily come up with some [00:40:00] ridiculous salary. Yeah, I.

Roger Harris: Mean like everything there are, there are some rules. So, um, it's a good thing to work with small business, You know, who have children? You know, of a family businesses to to. And there are some savings that could could be made there. And it's true for the spouse can be part of this too, as well. Uh, we're talking about kids here, but the spouse has the ability to do some of the same savings. So. Right. Let's talk a little bit. Again, this is not going to impact everybody. [00:40:30] But there's also some some changes in what we have historically called non-compete agreements. Now, in our business, if we have people who have a lot of contact with our clients, it's important that we somehow secure them. I'm going to use that term so that they can't go out and steal all our clients. And right, typically we have tried to do that by saying, if you leave, you can't [00:41:00] work in this business for one year within 30 miles of this office. Can we still do that?

Annie Schwab: We cannot. And this this is not. This is not, doll. This is. This is through the Federal Trade Commission. Right. So this is a bureau that is its goal. Its job is to stop unfair, deceptive, fraudulent business practices. Right? It's [00:41:30] protecting the customer, not the employee, but what it what it means is it's it's a way to offer, um, customers and business the rights and responsibilities to grow, to, um, grow themselves, grow their business, maintain a fair marketplace. Um, and so it does have to do with employment, right? Um, you know, it it's it's one of those things that you don't really think about unless you're the one who [00:42:00] signed the non-compete, right? Yeah, it doesn't really. It's not that important until you decide you don't want to work for this company anymore, or you want to go start your own practice, or you you want to, you know, go out on your own or branch out or change jobs, and then all of a sudden you feel as though you could be trapped. And and so the reason for, for the Federal Trade Commission coming out and saying, okay, non-competes no longer applicable. And there are some rules for transitions. If they were already in place prior to to [00:42:30] this ruling, there's like a transition grandfathered in period.

Roger Harris: But yeah, and this is another area where even prior to this ruling, some states were very aggressive in protecting the rights of the employees. It when I first started, you could pretty much have an ironclad. You can't do this in the world for two years. And yeah.

Annie Schwab: It was way more than one year. [00:43:00] You said one year and 30 miles. You said. I mean, it could be five years. It could be in the state. It could be, you know.

Roger Harris: And it started shrinking in terms of you can't deny the employee the ability to earn a living.

Annie Schwab: So well, an employee started pushing back. So, you know, it became a competitive thing. It became, um, you know, something where if you were interviewing with five people for the same salary and one of them wanted to make you sign a non-compete, well, that would be an incentive to not go work for them. So, [00:43:30] you know, especially now, it's hard to hire people. They don't they know that they have the power and they're not going to sign a non-compete. So making it no longer even available, I think helps even the market. Yeah. Um, now you know.

Roger Harris: It can create some problems for us. So let's say we bring somebody into our firm. We we expose them to all our systems, all of our knowledge, all of our clients. And they come in one day. And you know what, Annie? It's been nice [00:44:00] working for you, but I'm going across the street and taking all the clients, so shouldn't we be able to protect our business? Um. That's that's what the Non-competes were designed to designed to do. And. Yes. And I think the businesses got too aggressive and courts started chipping away, particularly the state level and in some states. So what I think we can still do and please, I'm not a lawyer and I don't even try to be one on TV. [00:44:30] You need to talk to your lawyer because the states are different. But my understanding from talking to our attorney is what is still allowable and non-competes aren't completely gone in certain areas and certain things. You can have some things, but non-solicitation agreements. Now that says you can't solicit my clients for some period of time, at least today, seem to still be okay.

Annie Schwab: So and that's different than going and poaching. Um, the clients and then saying I'm going to go across the street [00:45:00] and take everybody. Right.

Roger Harris: Um, so I can't keep any from going and starting her own business, even if she does it in the office next door. Right. But I probably can. And I'm going to say probably because I want you to talk to your lawyer. I can keep her for some limited period of time from taking my clients that she was exposed to through working for me. So it's a very narrow opportunity to to restrict [00:45:30] and protect the business owner. It's probably not what a lot of business owners want, but that may be the best you can get right now. And again, States are are in some instances have been there for a while. I know California made it almost impossible to be, uh, under any kind of non-compete agreement, but a non-solicitation a non-solicitation agreement might still be something you can do to protect your clients from [00:46:00] one of your key employees, which is important, and it's going to become really important to you. We think of it in the context of while I'm working, it's important, but it might be most important to you when you get ready to sell your practice.

Annie Schwab: It's just about to say that when you're ready to retire and you want to be able to sell your client base, you don't want an employee to be able to just take them, right?

Roger Harris: So the buyer comes in and says, all right, I'll give you, you know, one and a quarter times revenue and I'll pay you in cash. But oh, by [00:46:30] the way, all these employees that are here, what's their role? Have they been interacting with your clients? And are they in any way restricted from going out and taking these clients? No, I didn't think I needed that. Now, what do you think that's going to do to the value that that buyer is going to pay? Because they're the stranger to the clients? The known person to those clients are these employees who are free to walk out tomorrow and take their clients. [00:47:00] So I would again advise you, if you're in this business and you have good employees and key employees, particularly those that interact with clients and are known by the clients, and in some instances, the clients know them maybe better than they know you, right? Consult with your attorney and see what you can or cannot do to protect yourself, not only from them, taking them from you while you still own the firm, but making it more difficult to find a buyer [00:47:30] of your firm because they see a huge risk in your employees. So, and this.

Annie Schwab: Is another advisory opportunity to talk to your clients. Um, you know, let make sure they know what's going on and their practice. Maybe they want to have some sort of non-solicitation. Maybe they can't. Maybe they can. Um, but that's another piece of advice that is important in running a business, running a practice that's not necessarily, you know, a tax tip, [00:48:00] so to say, um, but it's, it's what our clients, what our clients here at pageant need.

Roger Harris: Yeah. Something like that. Probably from a just a pure dollars and cents standpoint. It might save somebody 50 times what any piece of tax advice would save them because of the destruction to their business if they aren't properly protected, uh, versus saving them a few hundred dollars a year because you deducted their [00:48:30] cell phone or something. I don't know what else we got. Anything else to talk about here?

Annie Schwab: No, I mean, this was, like you said, kind of a one off for us. We don't talk too much about employment stuff, but we are going to do another podcast, um, next month. Um, it's going to relate to, um, how to find and hire good remote or virtual employees. Uh, we're going to have a guest speaker join us. Jeff Phillips. Uh, we're also going to have and then I'll [00:49:00] be here as well, talking about, you know, how to implement that in a tax practice. Um, running a virtual office or having a remote employee employees. So we'll continue on this sort of employment topic for the next little bit. Yeah. We'll keep an eye out.

Roger Harris: We're going to look again. Our specialty is small business. And we think that it's an opportunity for us to hopefully talk about issues that are important to small businesses. We are going to focus a future podcast on [00:49:30] a, uh, an attorney who's been very involved in some of the IRC enforcement cases in terms of the audits, the promoters. So I think you'll find that interesting because.

Roger Harris:

Roger Harris: He's.

Annie Schwab: Got some stories.

Roger Harris: Yeah, he's got some stories. And it's probably not something that hopefully you've had to deal with. Uh, but uh, and he's been a writer in a lot of publications. So we're excited about that. So we're going to try to mix it up a little bit. And again, we'll watch for any changes in tax law or anything [00:50:00] that happens. And and again, if you're going to attend any of the IRS forums, particularly Dallas, Chicago.

Annie Schwab: I'll be in.

Roger Harris: Dallas and he'll be in Dallas. I'll be in Dallas for a while, but I won't be there in the entire time. But I will be in Chicago and Orlando, and we're going to have a table at our booth in the, uh, exhibit hall about the podcast, uh, asking for suggestions or topics. So if you're attending one of those forums, come to the exhibit hall, come to the Paget booth, [00:50:30] and.

Annie Schwab: Yeah, come say hi.

Roger Harris: Give us some ideas about future podcasts. Say hello to Annie or I or both of us if we're both there. And, um, we'll talk about future podcasts there. And, um, say hello to you. Any final words, Annie?

Annie Schwab: No, I think this was a great one. I hope to see some of you at the forums. And, um, really, we're just cruising along. Summer is going to be over before we know it. So yeah. [00:51:00]

Roger Harris: Unfortunately. But hey, then it'll be football season.

Annie Schwab: That's true, that's true.

Roger Harris: It could be worse.

Annie Schwab: All right, all right. Roger, thank you so much.

Roger Harris: Oh thank you Annie Annie does all the work here. I just show up and talk. So thank her when you see her. Thank her for all her hard work on putting these together. And and again, tell your friends, if you enjoy this podcast, tell your friends about it. Um, and thank you for for listening and we'll be back soon with another federal tax update podcast. So, Vianney. [00:51:30] Bye everybody else.

Annie Schwab: Bye, Roger. Thank you.

Creators and Guests

Annie Schwab, CPA
Annie Schwab, CPA
Franchisee Operations Manager at Padgett Business Services
Roger Harris, EA
Roger Harris, EA
President at Padgett Business Services
What Small Businesses Need to Know about New Overtime Rules
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